Question
A large corporation issues both fixed and floating-rate bonds, with terms given in the following table: COUPON BOND FLOATING-RATE BOND Issue size $250 million $280
A large corporation issues both fixed and floating-rate bonds, with terms given in the following table:
| COUPON BOND | FLOATING-RATE BOND | |
|---|---|---|
| Issue size | $250 million | $280 million |
| Maturity | 20 years | 20 years |
| Current price (% of par) | 96 | 98 |
| Current coupon | 8% | 7% |
| Coupon rate | Fixed coupon | T-bill rate + 2%, adjusts every year |
| Coupon payment period | Every 6 months | Every 6 months |
| Callable | 10 years after issue | 10 years after issue |
| Call price (% of par) | 106 | 102 |
Also given that yield-to-maturity of the fixed-rate coupon bond is 8.37% & yield-to-call of the fixed-rate coupon bond is 9%.
Answer the following questions:
(i) Which bond will have greater price range? Why? (ii) If the firm were to issue another fixed-rate note with a 20-year maturity, what coupon rate would it need to offer to issue the bond at par value? (iii) Which bond has a high call risk (probability of call)? Why?
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How To Build A Cyber Resilient Organization Internal Audit And IT Audit
Authors: Eugene Fredriksen
1st Edition
1032402210, 978-1032402215
